Donna Jamison, a recent UNC graduate with four years of for-profit health management experience, was
recently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer of
clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices outside its
home territory, and launched an expensive advertising campaign. Computron's results were not satisfactory,
to put it mildly. Its board of directors, which consisted of its president and vice president plus its major
stockholders (who were all local business people), was most upset when directors learned how the expansion
was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the cut off
credit. As a result, Al Watkins, Computrons president, was informed that changes would have to be made, and
quickly, or he would be fired. Also, at the board's insistence, Donna Jamison was brought in and given the job of
assistant to Fred Campo, a retired banker who was Computron's chairman and largest stockholder. Campo
agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's assistance.
Jamison began by gathering financial statements and other data, shown below. The data show the dire situation
that Computron Diagnostics was in after the expansion program. Thus far, sales have not been up to the
forecasted level, costs have been higher than were projected, and a large loss occurred in Year 2, rather than
the expected profit. Jamison examined monthly data for Year 2 (not given in the case), and she detected an
improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early
months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly
data. Also, it appears to be taking longer for the advertising program to get the message across, for the new
sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words,
the lags between spending money and deriving benefits were longer than Computron's managers had anticipated.
For these reasons, Jamison and Campo see hope for the companyprovided it can survive in the short run.
Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health,
and what actions should be taken.

Computron Diagnostics

Statement of Operations

Yr 1 Actual

Yr 2 Actual

Yr 3 Projected

Revenue:

Net patient service revenue

$3,432,000

$5,834,400

$7,035,600

Other revenue

$0

$0

$0

Total revenues

$3,432,000

$5,834,400

$7,035,600

Expenses:

Salaries and benefits

$2,864,000

$4,980,000

$5,800,000

Supplies

$240,000

$620,000

$512,960

Insurance and other

$50,000

$50,000

$50,000

Drugs

$50,000

$50,000

$50,000

Depreciation

$18,900

$116,960

$120,000

Interest

$62,500

$176,000

$80,000

Total expenses

$3,285,400

$5,992,960

$6,612,960

Operating income

$146,600

-$158,560

$422,640

Provision for income taxes

$58,640

-$63,424

$169,056

Net income

$87,960

-$95,136

$253,584

Computron Diagnostics

Balance Sheet

Yr 1 Actual

Yr 2 Actual

Yr 3 Projected

Assets

Current assets:

Cash

$9,000

$7,282

$14,000

Marketable securities

$48,600

$20,000

$71,632

Net accounts receivable

$351,200

$632,160

$878,000

Inventories

$715,200

$1,287,360

$1,716,480

Total current assets

$1,124,000

$1,946,802

$2,680,112

Property and equipment

$491,000

$1,202,950

$1,220,000

Less accumulated depreciation

$146,200

$263,160

$383,160

Net property and equipment

$344,800

$939,790

$836,840

Total assets

$1,468,800

$2,886,592

$3,516,952

Liabilities and shareholders' equity

Current liabilities:

Accounts payable

$145,600

$324,000

$359,800

Accrued expenses

$136,000

$284,960

$380,000

Notes payable

$120,000

$640,000

$220,000

Current portion of long-term debt

$80,000

$80,000

$80,000

Total current liabilities

$481,600

$1,328,960

$1,039,800

Long-term debt

$323,432

$1,000,000

$500,000

Shareholders' equity:

Common stock

$460,000

$460,000

$1,680,936

Retained earnings

$203,768

$97,632

$296,216

Total shareholders' equity

$663,768

$557,632

$1,977,152

Total liabilities and shareholders' equity

$1,468,800

$2,886,592

$3,516,952

Other data:

Stock price

$8.50

$6.00

$12.17

Shares outstanding

100,000

100,000

250,000

Tax rate

40%

40%

40%

Lease payments

$40,000

$40,000

$40,000

ANSWER

Industry

Yr 1 Actual

Yr 2 Actual

Yr 3 Projected

Average

Profitability ratios

Total margin

3.6%

Return on assets

9.0%

Return on equity

17.9%

Liquidity ratios

Current ratio

2.70

Days cash on hand

22.0

Debt management (capital structure) ratios

Debt ratio

50.0%

Debt to equity ratio

2.5

Times-interest-earned ratio

6.2

Cash flow coverage ratio

8.00

Asset management (activity) ratios

Fixed asset turnover

7.00

Total asset turnover

2.50

Days sales outstanding

32.0

Other ratios

Average age of plant

6.1

Earnings per share

n/a

Book value per share

n/a

Price/earnings ratio

16.20

Market/book ratio

2.90

Computron Diagnostics

Common Size Statement of Operations

Industry

Yr 1 Actual

Yr 2 Actual

Yr 3 Projected

Average

Revenue:

Net patient service revenue

100.0%

Other revenue

0.0%

Total revenues

100.0%

Expenses:

Salaries and benefits

84.5%

Supplies

3.9%

Insurance and other

0.3%

Provision for bad debts

0.3%

Depreciation

4.0%

Interest

1.1%

Total expenses

94.1%

Operating income

5.9%

Provision for income taxes

2.4%

Net income

3.5%

Computron Diagnostics

Common Size Balance Sheet

Industry

Yr 1 Actual

Yr 2 Actual

Yr 3 Projected

Average

Assets

Current assets:

Cash

0.3%

Marketable securities

0.3%

Net accounts receivable

22.3%

Inventories

41.2%

Total current assets

64.1%

Property and equipment

53.9%

Less accumulated depreciation

18.0%

Net property and equipment

35.9%

Total assets

100.0%

Liabilities and shareholders' equity

Current liabilities:

Accounts payable

10.2%

Accrued expenses

9.5%

Notes payable

2.4%

Current portion of long-term debt

1.6%

Total current liabilities

23.7%

Long-term debt

26.3%

Shareholders' equity:

Common stock

20.0%

Retained earnings

30.0%

Total shareholders' equity

50.0%

Total liabilities and shareholders' equity

100.0%